Foreign Minister Murray McCully has announced New Zealand will provide $1 million to help meet the humanitarian needs of people caught up in the Iraqi army's liberation of Mosul from Islamic State control.
The attack has started, and Mr McCully says hundreds of thousands of civilians could be displaced.
"The campaign to retake Mosul is a watershed moment in the fight against ISIL," Mr McCully said.
"Mosul is Iraq's second largest city and one of ISIL's remaining territorial strongholds - the campaign to liberate it will not be easy."
The $1m will help international refugee authorities set up emergency sites to provide shelter and essential assistance to those who choose to move out of the city.
Iraqi and Kurdish forces closing in on Mosul say they have secured 20 villages on the outskirts of the city in the first day of an operation to retake what is Islamic State's last major stronghold.
Peshmerga forces sit in the back of a vehicle in the east of Mosul during an operation to attack Islamic State militants (Reuters)
With about 1.5 million people still living in Mosul, the International Organisation for Migration said on Tuesday it was preparing gas masks in case of chemical attack by the jihadists, who had used such weapons previously against Iraqi Kurdish forces.
Tens of thousands of civilians could be forcibly expelled, trapped between fighting lines or used as human shields, said the IOM, one of many aid organisations to sound the alarm.
The fall of Mosul would signal the defeat of the ultra-hardline Sunni jihadists in Iraq but could also lead to land grabs and sectarian bloodletting between groups which fought after the 2003 overthrow of Saddam Hussein.
For US President Barack Obama, the campaign is a calculated risk, with US officials acknowledging there is no clear plan for how the region around Mosul will be governed once Islamic State is expelled.
The Iraqi army and Peshmerga forces from autonomous Iraqi Kurdistan began moving towards the city at dawn on Monday under air cover from a US-led coalition set up after Islamic State swept into Iraq from Syria in 2014.
Hoshiyar Zebari, a senior Kurdish official, said initial operations succeeded due to close co-operation between the Iraqi government and Kurdish peshmerga fighters, allowing them to clear Islamic State from 9 or 10 villages east of Mosul.
"Daesh is disoriented they don't know whether to expect attacks from the east or west or north," he told Reuters, using an Arabic acronym for the hardline Sunni group.
On Tuesday the attacking forces entered another phase, he said. "It won't be a spectacular attack on Mosul itself. It will be very cautious. It is a high risk operation for everybody."
Islamic State leader Abu Bakr al-Baghdadi, and explosives expert Fawzi Ali Nouimeh were both in the city, according to what he described as "solid" intelligence reports, indicating the group would put up significant resistance.
Islamic State said on Monday its fighters had targeted the attacking forces with 10 suicide bombs and that their foes had surrounded five villages but not taken them.
NZN / Reuters